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Monthly Archives: April 2014

Like many Americans, you’ve probably just spent a good bit of time figuring out how much you owe in taxes. Most of us fill in the forms and follow the rules. But the rules are a lot more flexible for the largest U.S. corporations, and especially for the major Wall Street financial institutions and their top executives and owners. Banks and financial companies capture more than 30 percent of the nation’s corporate profits, but manage to pay only about 18 percent of corporate taxes while contributing less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.

What’s more, the owners and senior managers of our major financial institutions can exploit the loopholes in our individual income tax on a far greater scale than the rest of us. Below is a short guide to a few of the major ways that Wall Street avoids paying its fair share.

But I earned it in the Cayman Islands!: American corporations have developed a panoply of ways to route income through low-tax foreign subsidiaries. This practice goes well beyond the financial sector. Indeed, the latest publicized example involves a manufacturing firm, Caterpillar. Because of the inherently “placeless” nature of many financial transactions, however, financial institutions and their investors are among those in the best position to move income around in this fashion. The major Wall Street banks have thousands of subsidiaries in dozens of countries, all capable of engaging in transactions that enjoy the full guarantee of the U.S. parent company even as they take advantage of the tax or legal advantages of their foreign incorporation. Transactions in the multi-trillion dollar global derivatives market, for example, can pretty much be relocated anywhere in the world with the touch of a computer keyboard.

A way to crack down on the massive potential for tax avoidance this creates would be to simply rule that financial transactions backed up by a U.S. firm are in effect U.S. transactions and subject to U.S. tax law. Whatever international tax rules are designed to protect real manufacturing activity in other jurisdictions from inappropriate taxation should not apply to the passive income gained from financial activities that can easily be transacted from anywhere in the world. For some years U.S. tax law attempted to follow this principle, but starting in 1997 an “active financing” loophole made it much easier for multinationals to avoid taxation on financial transactions by moving profits to low-tax foreign subsidiaries. Combined with so-called “look through” provisions, these international tax loopholes mean that U.S. multinationals get to look around the world for the cheapest places to locate their earnings.

It’s not work, it’s investment!: The U.S. taxes capital gains on investments much more lightly than it taxes ordinary income. The details get complicated, but in general the profit on investments is only taxed at a maximum 15 to 20 percent rate, as opposed to a rate of almost 40 percent for high levels of ordinary income. Though its stated goal is to encourage investment and saving, a tax differential of this size can be seen as a subsidy to financial speculation, since it penalizes wage work compared to trading profits, and accrues to any investment held longer than a year, whether or not it can be shown to actually create jobs. In addition to the broad impact of the tax differential, the gap in rates creates a windfall for wealthy Wall Street executives in a position to maximize its benefits. Those who work for big hedge and private equity funds are in the very best position to do that, as they take much of their work income from the investment returns of the fund. Since they are legally permitted to classify this “carried interest” income as capital gains, they can cut their tax rates effectively in half – a windfall that costs the federal government billions of dollars a year, and means that some of the wealthiest individuals in America pay a lower tax rate on their earnings than an upper-middle-class family might. Although with the increasing trend of the aforementioned upper-middle-class families to invest in stock utilising tools such as Stocktrades, they too can enjoy this benefit to a lesser extent. Now it’s just for the rest of us to catch up.

Who, me, sales tax?: It’s easy to forget at this time of year when we’re all working on our income tax, but the sales tax is also one of the major taxes you pay each year. State and local governments take in more than $460 billion a year through sales taxes charged on everything from cars to candy bars. But Wall Street speculation isn’t charged a sales tax at all. Indeed, you’ll pay more sales tax for your next pack of gum than all the traders on Wall Street will pay for the billions of transactions they undertake every year. The non-partisan Joint Tax Committee of the U.S. Congress estimates that a Wall Street speculation tax of just three basis points – three pennies per $100 of financial instruments bought and sold in the financial markets – would raise almost $400 billion over the next decade. What’s more, such a fee would significantly discourage the kind of predatory trading strategies recently highlighted by author Michael Lewis, strategies that depend on trading thousands of times in a second in order to manipulate stock markets and extract tiny profits from each trade.

This only starts the list of ways Wall Street financial institutions and the people who run them manipulate the system and avoid paying their fair share; there are plenty more, including the use of complex financial derivatives to shelter individual income, the variety of techniques used by hedge and private equity fund partners to avoid effective IRS enforcement, and the continuing tax deductibility of corporate pay above $1 million, as long as it is sheltered under a so-called “performance incentive.” Tax time would be a good time for our elected representatives to get to work closing some of these gaps and loopholes, and leveling the playing field.

How quickly a disturbing number of our elected representatives in Washington seem to forget.

The leaders of the House Financial Services Committee, to be more specific, will devote Tuesday morning to a hearing they have entitled “Who’s in Your Wallet? Examining How Washington Red Tape Impairs Economic Freedom.” Representatives of five major financial watchdog agencies will be quizzed onthe cost of regulation – the cost, the Committee says, not only to banks and lenders, but to the country. It’s the latest in a series of similar sessions conducted over the past few years bythe Financial Services Committee and the Government Oversight and Reform Committee.

Judging by the enormous amount of time they have set aside for these inquiries, you would never know we were living in a country that had recently experienced a cataclysmic loss of jobs, homes, household wealth, and economic output as a result of an era of financial deregulation, which left us with an out-of-control banking and lending industry.

Here are a few pieces of cost data that appear to have slipped off the Committee’s radar screen. First, on the impact of the financial and economic meltdown of 2008-09:

$13 trillion or more – projected loss of U.S. economic output, according to a January 2013 report by the Government Accountability Office.

8.8 million Americans – number who lost full-time jobs, according to the Associated Press, between December 2007 and June 2009, when the country was officially in recession.

42 percent – median amount of home equity lost by Americans between 2007 and 2010, according to the Federal Reserve.

$49,100 – average per-family loss of household wealth during those years, again according to Federal Reserve data.

The Financial Services Committee is expressing particular concern about the work of the Consumer Financial Protection Bureau, and its impact on consumer choice.

The Consumer Bureau has been a frequent Financial Services Committee target ever since it opened its doors in 2011. Unlike the Committee leadership, however, consumers overwhelmingly support the CFPB’s efforts to write and enforce rules against lending-industry tricks and traps. That agency, moreover, has actually been putting money back in the wallets of mistreated consumers. Its enforcement actions against credit card companies, debt collectors, and payday lenders have thus far delivered about $1.1 billion to nearly 10 million consumers. A recently announced CFPB mortgage servicing settlement promises another $2 billion in relief.

And there is plenty of work left to do. Abusive financial products continue to transfer billions of dollars a year from families and communities to the very worst players in the financial services world.

A few more numbers for the Committee to factor into its calculations:

$3.4 billion – estimated annual fees collected by triple-digit-interest payday lenders, according to a September 2013 report by the Center for Responsible Lending.

$3.5 billion – approximate total interest collected each year by auto-title lenders on loans of $1.6 billion, according to a study conducted by the Consumer Federation of America the Center for Responsible Lending.

$25.8 billion – estimated amount, according to another Center for Responsible Lending report, that consumers who bought cars in one year (2009) will ultimately pay because of kickbacks from third-party lenders to auto dealers for steering buyers into loans with higher interest rates than they could have qualified for.

High-frequency trading, or HFT, is suddenly the focus of investigations by the New York State Attorney General’s office, the FBI, the Commodity Futures Trading Commission and the Securities and Exchange Commission. It’s also the subject of a best-selling book, Michael Lewis’s “The Flash Boys,” which has catapulted the issue onto 60 Minutes and The Daily Show, among other prominent media places.

High-frequency traders use privileged computer placement to gain access to exchange data milliseconds ahead of the pack; then they insert themselves between buyers and sellers in order to turn tiny price differences into high-volume profits.

Since the Flash Crash of May 2010, there has been much talk about HFT’s potential to destabilize the securities markets. The world has been slower to wake up to the more basic point that, even in the stablest of times, high-frequency trading is electronic highway robbery – a raid on the pocketbooks of investors and the credibility of financial markets.

Many people are attempting to try and pull apart these HTF strategies through using Paper Trading simulators, on websites such as bearbulltraders.com/simulator/. By not risking their own money, they are trying to figure how to trade with, and how to counter trade HFT algorithms and institutions.

Now, at last, the immoral and predatory nature of this activity is beginning to attract the notice of lawmakers as well as regulators, journalists, and talk-show hosts. Here’s something – one thing – Washington could do about it: enact a Wall Street speculation tax.

Because of the tremendous volume on which algorithmic traders depend, a very small tax on individual transactions – too small to make a noticeable difference to ordinary investors – would be enough to make high-frequency trading unprofitable. In addition, a speculation tax, or financial transaction tax, would raise significant revenue – hundreds of billions of dollars over 10 years, according to the Congressional Budget Office. It would collect that money from other high-volume Wall Street players, even as it incentivized them to slow down a bit, thus nudging the financial markets away from churning and short term gamesmanship toward more useful private and public investment.

That combination of benefits explains why a wide range of economists and other experts – including many notable figures from inside the financial industry itself – have come out in favor of the idea.

Eleven EU nations are moving towards the enactment of such a tax. In our country, speculation-tax bills have been introduced in both chambers of the 113th Congress. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio have joined forces to propose a .03 percent tax (that’s just 30 cents per $1000). Minnesota Representative Keith Ellison has introduced a bill calling for a significantly higher, but still modest, tax of 0.5 percent. Their efforts deserve wide and serious support.

After two years of study, the Consumer Financial Protection Bureau is moving closer to writing new rules for payday loans online and small-dollar loans. At the Country Music Hall of Fame in in Nashville, Tennessee, last week, bureau leaders heard from a roundtable of authorities and a packed house of citizens – people with strong opinions and, in many cases, personal stories to tell. A day later, on Capitol Hill, a panel of experts answered senators’ questions about some of the same loan categories and concerns.

Witnesses at both events cited a new bureau analysis of data from more than 12 million storefront payday loans issued over a 12-month period. The report confirms the two major findings of earlier research. First, these triple-digit interest loans, promoted by lenders as a way of dealing with a short-term crisis, consistently lead borrowers into a cycle of unmanageable debt. And second, as Consumer Protection Bureau Director Richard Cordray noted, “The business model of the payday loan industry depends on people becoming stuck in these loans for the long term.” Most of the industry’s revenue, in other words, comes from keeping borrowers on the hook and getting them to pay fees that very often dwarf the amount of the original loan.

The latest data should bolster the bureau’s resolve to act. But, as the evidence makes increasingly clear, the bureau will have to resist the temptation to focus exclusively on the traditional two-to-four week loan with a lump-sum repayment. To keep pace with a fast-moving market, rulemaking must also address the payday-like problems of an array of longer-term loan products developed by an industry that is playing all the angles to get around the rules – the anticipated as well as existing ones. Payday loans can help people out in financial difficulty. But it is also important to weigh up all the options. If you are interested in looking into getting a payday loan or want to find out more about it, you could check here for more information. It is always best to do your research before committing to anything.

Payday lending took root in the early 1990s, after the big banks and their credit-card divisions laid waste to state usury laws that had been the norm across the country. Twenty-five years later, payday lending is a huge and highly profitable industry, but a badly failed experiment when it comes to its supposed purpose of helping people in a jam.

In the Consumer Protection Bureau’s tracking, four out of five payday loans were rolled over or renewed within two weeks, and more than one in five initial loans led to a sequence of at least seven loans altogether. Among borrowers with monthly paychecks (a group that includes recipients of Social Security retirement and disability benefits), one out of five took out a loan in every month of the year!

Molly Fleming-Pierre came to Nashville from Kansas City, where she works on economic justice issues for a faith-based partnership of more than 200 Missouri congregations. Fleming-Pierre told the story of a disabled Vietnam veteran who had borrowed to help with mortgage payments and his wife’s medical expenses after she broke her ankle. The vet wound up, she testified, with “five payday loans that he spiraled in for three years,” eventually costing him $30,000 in payments and contributing to the loss of his home.

In Nashville and in Washington, the witness lists included industry representatives pleading the cause of individual liberty and professing to speak for their customers as well as themselves. But when the Pew Charitable Trusts conducted a national survey of payday borrowers, the great majority, according to Pew’s Nick Bourke, supported stronger regulation of payday lenders, with eight in 10 favoring a rule to limit payments to a small fraction of any one paycheck.

One reason for that attitude, Bourke and others suggested, is that borrowers frequently go into these loans with only a vague understanding of the costs. Stephen Reeves of the Cooperative Baptist Fellowship in Decatur, Ga., has been working on payday and small-dollar lending issues for five years. In that time, Reeves said, he has heard “again and again” from borrowers who say they have been making steady payments for months with “no idea … that they were not reducing what they owed.”

At the state level, voters and elected officials are wising up to these realities. Twenty-two states have passed laws establishing interest-rate caps or other restrictions on payday lending. But while some of these efforts have made a positive difference, the results show that the states can’t do it alone.

In response to the new regulations, the industry has been moving toward installment loans, auto-title loans and other products that often turn out to have the same key problems: high fees or rates, often camouflaged and hard to figure out, and automatic repayment mechanisms that allow lenders to extract money from borrowers’ bank accounts even if that means leaving them unable to pay rent, utilities and other basic living expenses.

The typical storefront payday loan has an effective annual interest rate of nearly 400 percent, according to Nathalie Martin of the University of New Mexico law school, who testified at Wednesday’s Senate hearing. Auto-title loan interest tends to be a little lower – in the 300-percent range, she said. But Martin added that the interest rates on installment loans, especially the types that payday lenders have developed to get around state regulation, can be far higher. “One consumer I know borrowed $100 and paid back a thousand dollars in 12 months’ time,” Martin said. “That’s 1100 percent interest.”

In some of the states most in need of new laws, moreover, legislators have had trouble summoning the will to act. Rev. Robert Bushey Jr., a pastor in Kankakee, Ill., came to Washington late last year to plead for a national response. Like other members of a delegation organized by National People’s Action, Bushey had participated in unsuccessful campaigns for legislation at the state level. “The payday lobby is very strong in the states where payday exists,” was how he summed up the obstacles.

State regulators now face the fresh challenge of responding to the rapid growth of online lending. Many of the online players operate across international as well as state borders, and some claim legal immunity on the basis of tribal relationships they have forged expressly for that purpose.

Effective regulation, then, must come from Washington. And the Consumer Protection Bureau will need to act broadly as well as decisively. An overly narrow rule would only set the stage for another era of innovation in abuse and exploitation (rather than in serving the real needs of consumers).

The industry is hoping for rules that focus on short-term loans and the “rollover” issue. But the weight of accumulating evidence points to two key problematic features that can be found in a far wider class of loans.One is the reliance on postdated checks and other mechanisms that allow the lender to take control of a borrower’s bank account. The other is the practice of issuing loans without seriously assessing a borrower’s ability to repay – to repay out of income, that is, rather than out of money needed for food, rent, fuel and other urgent priorities.

That fatal combination of loan features frames the challenge that faces Consumer Protection Bureau leaders. As they have already done in the mortgage market, to their great credit, they must now require consumer lenders to verify borrowers’ real ability to repay, and not just the lenders’ own ability to collect. Just as important, they must make it possible for borrowers to retake control of their bank accounts. Without the second requirement, lenders will never take the first one seriously.

New research from the Federal Reserve Bank of New York finds that the largest global banks – those perceived as being ”too big to fail” – enjoy a funding advantage that allows them to get loans more cheaply than their smaller competitors. Even more disturbing, this advantage seems to lead them to engage in more risky behavior, as measured by impaired and charged off loans.

Some have challenged these findings, by claiming that large non-financial firms also have lower borrowing costs than smaller firms; in other words, the argument goes, the funding advantage is not due to the ”too big to fail” perception of potential government support. But Santos’ research finds that large banks have a borrowing-cost advantage significantly greater than any advantage of large firms in other industries. As he states, his results “suggest that the cost advantage that the largest banks enjoy in the bond market relative to their smaller peers is unique to banks.”

In further research, Santos and coauthors Garo Afonso and James Traina find that the perception of ”too big to fail” status and an accompanying potential for government support appears to lead banks to engage in more risky behavior. Banks classified by ratings agencies as likely to receive government support have greater loan losses and a higher percentage of impaired loans, the paper finds, than do institutions that are not so classified. This suggests that banks take advantage of the implicit expectation of taxpayer support in the event of losses by pursuing higher profits through riskier lending. The possibility that losses from these loans could be transferred to the public leads to riskier bank behavior.

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